Spanish stocks ready to rally after Catalan election news

Spanish stocks are leading European markets higher this morning, and the Ibex is up some 1.3% so far on reports that the Catalan President Puigdemont will call regional elections on December 20^th. This is being cheered by the markets as it suggests that Puigdemont and co. prefer to stake their political reputations on re-election rather than independence at this junction. This suggests that the political big-wigs would rather get an official mandate before they pursue the costly and legally complex route to independence from Spain.

This development matters for the markets, which have mostly turned a blind eye to the Spanish/ Catalan crisis, because it kicks a potential political cinder box down the road to the end of 2018. Markets like certainty, no matter how short term that certainty may be. The markets may hope that by giving Catalans a second chance to vote the result could be unanimous to stay part of Spain, essentially putting to bed the threat of a break up of Spain and potential accompanying civil discord.

Ibex benefits from cooling political temperature

This is good news for the Ibex, which, as we have mentioned before, has been feeling the brunt of investor fears over Catalan secession from Spain. We believe that there will be a more muted impact on Spanish bonds and instead this could be a good opportunity for the Ibex to recover and play catch up with other major indices.

As a result of today’s move, the Ibex has popped its head above the base of the daily Ichimoku cloud, as you can see below, which suggests that this index is no longer in a downtrend, it has technically been in a downtrend since June. If this index can break above 10,422 – the top of the daily Ichimoku cloud and approx. 115 points higher than where we are now – then this would suggest that a recovery and uptrend is back on the cards.

A caveat to all of this is that we still need to get confirmation that the election will actually take place without Madrid’s interference. The Catalan leader is expected to give a press conference this evening, if he fails to announce the election and instead pursues the independence option then it could be curtains for this Ibex recovery.

Chart 1:

Source: City Index and Bloomberg